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Middle market companies have had a year to react to the 2018 tax reform. Did the savings meet their expectations? What did they do with the savings? To find out about these and other tax reform-related issues, KeyBank surveyed 400 middle market business owners and executives*.

How has the tax reform affected middle market companies?

As the new tax reform policies were introduced last year, most middle market companies felt they had a solid understanding of what the legislation entailed. Based on our survey, they still feel that way a year later. A majority experienced at least moderate savings from tax reform, which was mostly in line with their expectations, albeit with somewhat lower savings than originally anticipated.

Did middle market companies get the tax savings they expected?


March 2018: Expected savings from tax reform

Extremely High Savings - 12%

High Savings - 28%

Moderate Savings - 34%

Very Little Savings - 22%

No Savings - 4%


March 2019: Actual savings from tax reform

Extremely High Savings - 13%

High Savings - 21%

Moderate Savings - 36%

Very Little Savings - 24%

No Savings - 6%

What have middle market companies done with their tax savings?

A year ago, the largest percentage of middle market companies planned to use their tax savings on expanding their businesses. Since then, more have actually used the savings to strengthen their financial position.

Tax reform – how did companies use their tax savings?


March 2018

2% - None of the above

16% - Increased employee benefits

19% - Increased compensation of employees, owners, or shareholders

33% - Expanded/grow business 

30% - Strengthened company financial position


March 2019

2% - None of the above

18% - Increased employee benefits

21% - Increased compensation of employees, owners, or shareholders

21% - Expanded/grow business

38% - Strengthened company financial position

“There isn’t a “one size fits all” approach to deploying tax savings. Companies are evaluating how to use the tax benefits to best meet the needs of their unique situation and their risk tolerance. Some are investing in growth or technologies that yield increased profits, while others are choosing to invest in employees or pay down debt as a strategy to avoid downside risk.”

- Laurie Muller-Girard, KeyBank Regional Sales Executive

How did companies strengthen their financial positions?

March 2018

Increased cash on hand/reserves - 70%

Paid down debt - 46%

Implemented a stock buyback program - 31%


March 2019

Increased cash on hand/reserves - 66%

Paid down debt - 56%

Implemented a stock buyback program - 22%

Also contributing to the strengthening of financial positions is uncertainty around tariffs, interest rates, and how long these lower tax rates will actually last. These factors only added to the reluctance of companies to use their tax savings on business expansion efforts. Increasing cash on hand/reserves and utilizing their savings to pay down debt were the most common ways companies strengthened their balance sheets.

“A concern we hear from many companies is, ‘It’s great the tax act came down, but that’s good for maybe two more years, and then if we get a new administration and a new legislature, they’ll simply boost the tax rate again. I’m not going to put a lot of money into something that has a 20-year useful life if my tax cut is only effective for two years.”

– Bruce McCain, Key Private Bank Chief Investment Strategist

How else have middle market companies used their tax savings?

Of course, some middle market companies are still using their savings to invest in other areas beyond just strengthening their financial position, such as for business expansion.

Of those using the funds to help with business expansion, adding employees, making significant equipment purchases, and expanding/ renovating current facilities have been the main areas of focus. This is in contrast to a year ago, where more middle market companies expected to use the majority of their tax savings to add new facilities/locations.

Otherwise, middle market companies’ actual usage of their savings to this point has mostly been in line with what they foresaw a year ago. About 20 percent of companies increased employee benefits, with a majority of those addressing 401(k) company match increases and improved healthcare benefits. Close to another 20 percent implemented increased employee/owner/shareholder compensation, with most doing so via ongoing wage increases.

Middle market companies vs. large corporations

Middle market companies’ inclination toward increasing cash on hand and paying off debt to strengthen their financial position via their tax savings differs from the tendency of larger companies. By comparison, a number of large corporations used their tax savings to fund stock buybacks, and in some cases, also increased their dividend payouts. Apple, Walt Disney, Visa International, and Starbucks all exemplify this trend, as they used their tax savings to boost share buybacks by an average of 75.5 percent.1

Economic and business snapshot

As they largely have over the past year, middle market companies remain somewhat optimistic overall in their outlooks at the company, state, and overall U.S. economy levels. Higher-revenue companies, in particular, tend to have a more optimistic outlook.

Overall outlook


Company March 2019

1% Poor

5% Fair

15% Good

46% Very good

33% Excellent


State Economy March 2019

3% Poor

11% Fair

26% Good

34% Very good

26% Excellent


U.S. Economy March 2019

3% Poor

14% Fair

27% Good

25% Very good

31% Excellent


Excellent/Very good State Economic Outlook

$500M-$2B


Excellent/Very good U.S. Economic Outlook

$500M-$2B

With respect to business expansion, plans remain fairly steady, with a majority looking to achieve some level of expansion in the next six months, even if it’s not necessarily tied to any tax savings. The most common method of expansion is adding new employees, followed by expanding/renovating current facilities and making significant equipment purchases. Acquisition consideration has also remained somewhat consistent since the end of 2018.

Expansion Plans - Plan to expand Q2 2019

Method for expanding

72% - Add employees (full-time, part-time or contract)

56% - Expand or renovate current facilities

51% - Make significant equipment purchases

49% - Add new facilities or locations

KeyBank can help you navigate the new tax reality.

With the close of the first “post-tax-reform” filing season, 2019 warrants a closer look at how tax reform has impacted your business over the past year to be sure it is being used as effectively as possible. We have specialists who can advise you on the nuances of the new tax law, such as 100% expensing, tax ownership, and more. Our experts understand tax reform and can help you determine if a lease or loan is the best alternative for your organization.

Read more from our experts about tax reform and its impact on equipment acquisition strategies.

No matter your plans, KeyBank makes it a point to understand your business, your industry and your goals to bring in value-added strategic ideas, insight, and capital to help your business grow.

Let’s talk about your business.

For more information, contact a regional executive.

Disclosures

"KeyBank Middle Market Business Sentiment Survey” March 2019.

*

Business Owners/Executives—This sample group represents the opinions of respondents who are specifically business owners, C-suite professionals, or have the title of SVP, VP, controller or treasurer ($10M to under $2B revenues).

This document is designed to provide general information only and is not comprehensive nor is it legal advice. If legal advice or other expert assistance is required, the services of a competent professional should be sought. KeyBank does not make any warranties regarding the results obtained from the use of this information.

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